FCC Reply Comments regarding Wholesale Unbundling

Submission Date:

02/12/2008

I. INTRODUCTION AND SUMMARY

The record in this proceeding reflects a sharp divide. On one side are the media conglomerates, programmers and broadcasters. On the other are smaller distributors and the consumers they serve, most often in smaller markets and rural areas.

Not surprisingly, programmers and broadcasters defend current wholesale programming and retransmission consent practices. They argue that current wholesale practices are necessary to preserve their business models and expand distribution of, and payment for, their programming, regardless of demand, or lack thereof. Oddly, however, they also defend current wholesale practices as in the best interests of consumers. Essentially, they argue that consumers are better off paying for channel packages bloated with undesired channels, and that consumers served by smaller distributors somehow benefit because smaller distributors must pay much more than large distributors for the very same channels. Programmers and broadcasters insist that any change to the wholesale status quo threatens a range of awful outcomes. Finally, they argue that even if current wholesale practices harm the public interest, the Commission has no authority to do anything about it.

The record also contains extensive input from smaller distributors, more than 1,500 companies represented by ACA and other groups. These small companies describe a wholesale market rife with “take it or leave it” tying and bundling, tier placement and distribution obligations, and widespread price discrimination, all imposed by programmers and broadcasters with overwhelming market power. Moreover, price discrimination in retransmission consent transactions is rapidly escalating to unprecedented levels.

The record shows that wholesale programming and retransmission consent practices restrict the ability of small and medium-sized cable companies to offer more choice at retail, while at the same time, significantly increasing their costs. Smaller distributors call for the Commission to act and alleviate the harms resulting from current wholesale practices. To this end, ACA has proposed minor adjustments to the program access and retransmission consent regulations that would help address the problems with the current wholesale market, and help smaller cable companies deliver more choice and better value at retail.

The record presents the Commission with a clear choice. The Commission can act to mitigate the harms of current wholesale practices, or the Commission can do nothing and accept the status quo. ACA advocates the former. The proposals set forth in ACA’s comments provide a restrained and measured approach, and the Commission should adopt them.

These Reply Comments address the following six issues:

The Commission must act to constrain sharply escalating retransmission consent price discrimination. The magnitude of retransmission consent price discrimination against smaller distributors has reached unprecedented – and unconscionable – levels. Broadcast licensees are exploiting their market power to extract fees from smaller distributors up to twenty times higher than paid by larger MVPDs. As former FCC Chief Economist William P. Rogerson concludes, no economic rationale or discernable public policy supports this price discrimination. Rather, retransmission consent price discrimination represents sheer abuse of market power by powerful broadcast groups and networks. This conduct raises costs for rural distributors and consumers and impedes broadband deployment. The Commission should not allow this to continue. As stated by Professor Rogerson:

Higher retransmission consent fees are passed through to subscribers in the form of higher subscription fees. The government has granted commercial broadcasters with valuable spectrum and provides a range of legal and regulatory protections to help ensure the availability of broadcast television to the public. The use of some of those legal and regulatory protections to extract substantially higher fees from smaller distributors and their customers raises policy questions that the Commission should consider carefully.

I think that the Commission should carefully consider whether adjustments to regulations that would spread this burden more equally across all MVPD subscribers would be more consistent with the Commission’s public policy objectives.

The record confirms that current wholesale programming and retransmission consent practices harm broadband deployment. The record corroborates ACA’s findings that current wholesale practices impede broadband deployment, especially in smaller markets. To advance the important policy goal of ubiquitous broadband, the Commission must curtail wholesale programming and retransmission consent practices that substantially increase costs for video services and divert resources from rural broadband deployment.

The record confirms that smaller distributors face “take it or leave it” wholesale tying and bundling, tiering and distribution obligations, and price discrimination. Programmers and broadcasters claim that they routinely offer channels on a standalone basis and provide flexible “menus” of “options.” The record shows the wholesale market described by programmers and broadcasters is a fantasy land, at least for small and medium-sized cable companies. Smaller distributors uniformly describe how “take or leave it” tying, bundling, tiering and distribution
obligations, and price discrimination predominate their transactions with programmers and broadcasters.

ACA’s proposed adjustments to Commission regulations fully accommodate programmer and broadcaster concerns with a prohibition on bundled offerings. Programmers and broadcasters raise several objections to a blanket prohibition on wholesale channel packages. ACA’s proposals fully accommodate those objections. Rather than prohibit wholesale bundles, the Commission should obligate programmers and broadcasters to also offer channels on a standalone basis, on reasonable prices, terms and conditions. This change would not restrict wholesale offerings, it would expand them, with concomitant benefits at the retail level.

Additionally, programmers claim they already offer channels on a standalone basis, so they should have no objection to codification of this practice.

Concerning retransmission consent, ACA’s proposals would help protect consumers from non-cost based price discrimination. Professor Rogerson concludes that regulations like those proposed by ACA could alleviate the harms of retransmission consent price discrimination “in a workable and fairly simple fashion.”

The record confirms the need for a standstill provision in program access and retransmission consent complaint regulations. Smaller distributors consistently describe how the current program access and retransmission complaint processes do not provide effective remedies. As the Commission has repeatedly found, and as this record affirms, when a smaller cable system is involved, the threat of temporary withdrawal of a must have channel overwhelmingly skews a negotiation in favor of the programmer or broadcaster. The Commission should adjust its regulations to permit continued carriage of a channel while a program access or retransmission consent complaint is pending.

The record validates that the Commission has authority to adopt the regulations proposed by ACA. Programmers and broadcasters argue that the Commission does not have authority to address the public interest harms caused by current wholesale practices. The record reflects ample input to the contrary.

The record in this proceeding demonstrates the incentive and ability of powerful programmers and broadcasters to use wholesale practices to reduce choice and raise costs at retail, harming the public interest, especially in markets served by small and medium-sized cable companies. Consumers in those markets need some help from the Commission. The record in this proceeding provides ample basis for the Commission to act.